Broader Market to Consolidate—No More Upside Without the Fed

By Mitchell Clark, B.Comm. Published : August 13, 2012

A lot of smaller companies and micro-cap stocks are now reporting their quarterly earnings, and a lot of the numbers are pretty good. I’ve noticed particular financial strength in a number of micro-cap technology companies, along with good trading action among biotech companies.

There’s no real trend among micro-cap stocks, aside from the Russell 2000 Index, which is about five percent below its recent high set in March of this year. The broader stock market has held up well over the last several quarters, and the Russell has pretty much mimicked the S&P 500.

The best action for stock market investors, as far as I’m concerned, has been in large-cap, dividend paying companies. Micro-cap stocks, like biotech companies, don’t particularly trade as a group; their action is event-driven. Investment risk in the stock market today is very high, and institutional investors have been reticent to invest in micro-cap stocks. The security of dividend income is the reason why so many large-cap companies are trading right at their highs.

The price momentum in this kind of stock market is with large-caps, and it’s going to stay this way going into 2013. There are very few micro-cap stocks in this market that are providing consistent returns; off the bat; I can’t name any. Among micro-cap stocks, industry groups that stand out as the most attractive for risk-capital investors are technology, biotechnology, and mining. All of these subsectors, however, are being met with little investor participation among individuals. Trading action in today’s stock market is only about institutions, and that’s why any micro-cap stocks being considered need to have what institutions are looking for if investors want any chance of getting a decent return on their investment. The story has to be good, but so does the liquidity.

I see the stock market consolidating for the rest of this month. Trading volume is pretty lackluster and so are expectations. A lot of U.S.-listed Chinese micro-cap stocks are hitting new 52-week lows right now. Institutional investors have basically abandoned the group due to accountability problems. Right now, I don’t see the need for stock market speculators (or investors) to be taking much action. I wouldn’t be buying the stock market’s leading large-caps unless they correct in price, and I would be highly selective among any micro-cap stocks. (See “The Top Stocks Making Money in This Market Right Now.”)

Without the Federal Reserve, I don’t think the stock market has any more legs, given the earnings outlook we now face. The good news is that the stock market’s valuation is reasonable, and this tempers the immediate downside. Right now, the stock market is trading where it should. There’s no definable trend and, therefore, no need to take any bold action.